Every year, public and private companies throughout the world have their financial statements audited. In the confirmation process of an audit, public accountants confirm three line items on a balance sheet: the cash balance, a sampling of the account receivables, and a sampling of account payables. This confirmation process is the only step still being completed using paper by accounting firms. The current practice is to send paper confirmations through the post office requiring the manual filling out of the paper confirmation form by a financial institution's clerk or the receiving company's staff, and then returning the confirmation by mail or fax to the auditor.
Today, the confirmation—consists of approximately 32 steps. The confirmation process begins when the audited client fills out a paper confirmation form supplied by the client's accountant. The current industry practice is to send paper confirmations by mail, Federal Express, or other like carriers. Once received by a bank, brokerage, or receiving company, the arriving mail is then privately sorted, hopefully routed to the appropriate department or departments, and usually dispatched to hired staff engaged in accommodating such requests. Once the confirmation is in proper hands, the task is generally viewed as a tedious process requiring manual, accurate, and prompt completion.
Financial institutions vary in how they process confirmations, though most larger financial institutions have one or more cost centers devoted solely to processing confirmations. Additional costs are incurred during busy seasons when the employees work overtime in conjunction with temporary staffing to meet the demand of answering confirmations.
Currently, when the manual paper confirmation process works optimally (60% to 80% of the time), it takes a minimum of 2 to 3 weeks to complete. When there are complications (reported 20% to 40% of the time), such as incorrect statement date, incorrect account balances, or no response to the request for confirmation, etc., the process can take up to 4 to 6 weeks to complete. Invariably, with such complications, the costs to financial institutions, accounting firms, and the client being audited-increase.
Because of the industry conditions, accounting firms are constantly seeking ways to reduce the costs of an audit. Due to the technological advances within the past few years, accounting firms have recognized the benefits of a paperless audit. No longer do managers and partners need to be at the client location to review the audit work. They can perform their review of the staff's work from anywhere at anytime. Staff accountants no longer have to receive paper copies of the client's data, the client can now provide the staff with electronic versions of the data, which are easier for the staff accountant to manipulate and audit.
Today, most of the national and even some of the regional and local accounting firms, all audit steps except third-party confirmations are paperless. Many accounting firms that have not adopted the paperless process are also now moving to a paperless audit, barring the one process that is still performed manually using paper. This step includes the confirmation of the cash, receivables, and payables balances. Consequently, there is a need to further reduce costs associated with auditing by automating the step of confirming cash, receivables, and payables balances.
The superiority of the electronic confirmation over the paper confirmation is evident through the fact that the electronic confirmation eliminates the current concerns and constraints surrounding paper confirmations. Also, unknown to the accountant, the current practice of confirming balances leaves an opening for fraud, thus creating increased liability for the accountant. For instance, in the current paper confirmation process, most accountants ask the client to fill out the paper confirmation form. The accountant then mails that confirmation to the financial institution to be filled out. The accountant has a couple of stipulations in sending out that confirmation.
First, confirmations usually cannot be mailed out from or faxed back to the client's office. This is to protect the integrity of the confirmation process. The accountant cannot give the client access to the confirmations after the client has filled out the form for fear the client may intercept them and alter the information. This can pose a problem if the accountant's office is not in the same city or even the same building as their client. If the confirmations are mailed back from the financial institution to the accountant's office, the accountant must either go back to his or her office to retrieve them, or have someone in the office bundle up the confirmations as they come back and forward them via mail to the accountant's hotel or neutral location. If the confirmations are faxed back from the financial institution, the accountant must either stand by the fax machine waiting on the financial institution to fax them back so the accountant can witness the confirmations as they are received over the fax machine, or the accountant must use an off site fax machine, at an independent copy center. Such centers typically charge for this service adding additional cost to the audit process.
Second, the accountant is usually not allowed to send confirmations to a post office box for fear the post office box is not really the financial institution's address, but rather a third-party who is attempting to defraud the company or auditor.
Additionally, the conventional confirmation process is subject to other fraudulent practices. Currently, in the conventional process the accountant instructs the client to fill out the paper confirmation before it is sent for confirmation. This includes directing the client to fill out the proper financial institution address. Most accountants rely solely on the client for this information and do not employ any system for countering incorrect information supplied by the client. As it stands now, the client, in an effort to deceive the accountant, could use any erroneous address, which would suggest legitimacy, as long as it is not addressed to a post office box. The accountant may then, unknowingly send the confirmation to the client's own house, erroneous address, friend or relative thus perpetuating and facilitating fraud. The lack of checks and balances in the current process allows for an information imbalance thus creating a liability for the accountant. There is no timely or convenient mechanism to ensure that the address on the confirmation is a valid address, nor is it practical for accountants to verify the information themselves.
Thus, there is a need for a more secure, more efficient method by which third-party confirmations can occur that is resistant to fraud and more timely in nature.